South Florida Condominium Market October 2004 Rosen Consulting Group 1995 University Avenue Suite 550 Berkeley, CA 94704 510 549-4510 510 849-1209 fax www.rosenconsulting.com © 2004 Rosen Consulting Group Table of Contents South Florida Condominium Market Page Executive Summary 1 Introduction 3 Economy 4 Demographics 9 South Florida Condominium Market Historical Perspective 11 Demand 11 Condominium Price Appreciation 12 Sources of Demand and Buyer Profiles Speculative Investment 15 Demographic Profile of Current Condominium Owners 16 Supply Historical Trend Towards Condominium Development 18 Land Supply 18 Permits on the Rise 19 Building Activity by Submarket Miami 21 Broward County 23 Palm Beach County 25 Condominium Conversions 27 Outlook and Conclusion 29 © 2004 Rosen Consulting Group, LLC Executive Summary • The South Florida condominium market has become • The current condominium construction boom and rapid overheated with speculative demand leading to a pre- acceleration in prices seems to have been caused in mium in prices and rapid development creating a po- part by interest from speculative investors rather tential supply overhang in the upcoming years. than a sea change in the profile of residential demand in South Florida. Investors from Latin America, Europe, Summary of Current Conditions and the United States have driven up prices of preconstruction luxury high-rise units. • Current economic and demographic trends are positive in South Florida and will likely stay that way. • The majority of activity currently underway is focused The area’s high quality of life, warm weather, location on the luxury high-rise segment of the market. at the intersection of the United States and Latin While luxury high-rise condominiums have historically America, and business-friendly climate will attract new been a strong product type in South Florida and de- residents and jobs, which bodes well for South Florida mand from snowbirds and second homebuyers will re- housing markets in the long run. main strong for this type of unit in the future, the cur- rent level of construction appears to be excessive. • Additionally, the limited supply of developable land in the area will encourage dense in-fill development • Some areas are better positioned to endure the going forward. The sprawling master-planned subur- supply deluge. South Beach is almost entirely built out ban development of the past will gradually be replaced and will likely stay attractive because of limits on future by medium and high-density residential development supply and the unique and appealing dynamic of the both in established urban and suburban residential ar- neighborhood. Broward and Palm Beach Counties may eas and in urban redevelopment sites. benefit from the current lower levels of speculation. The synergy created by three new massive develop- • However, approximately 15,000 high rise luxury condo- ments at a desirable corner in downtown Miami could minium units are currently under construction in South create value for residential purchasers that does not Florida and more than 50,000 additional units are ei- exist at the more scattered projects to the north of down- ther planned or proposed for the area. In the city of town. Individual projects, too, will fare differently. RCG Miami alone, 9,800 major use special permit residen- is particularly concerned about conditions in Miami- tial units are currently under construction and an addi- Dade County, where development activity is currently tional 37,000 are proposed. The majority of these units exceeding levels in Broward and Palm Beach Counties. are projected to come online between 2005 and 2007, creating a surge in new supply. The current level of • The recent hurricanes in Florida have left the majority condominium development is unprecedented for the of South Florida condominium development largely area, although other booms have occurred in the apart- unscathed. Hurricanes Charley and Ivan skirted the ment, single family, and land markets in the past. Southeastern section of Florida and the eye of Hurri- cane Frances brushed to the north of Palm Beach • Rapid price appreciation has occurred for both new County. Even with 120-mile per hour winds in the area, and existing condominium in the area. Similar, but less stricter building codes and advanced preparation saved extreme, price appreciation in the late 1970s and early most building sites from significant damage. Since 1980s was followed by declining values in subsequent Hurricane Andrew devastated South Florida in 1992, years. Although condominium price appreciation in re- all high-rises are now required to use laminated high- cent years has mirrored similar gains in the single fam- impact glass to reduce damage. If anything, the hurri- ily market and in prices nationwide, price appreciation canes will likely be a boon to the local economy as for preconstruction units and the overall volume of ac- federal relief dollars flow to the state and displaced tivity are causes for concern. The risk for declining val- residents of other counties seek housing in the less- ues is most significant in Broward County and in the affected counties of South Florida. luxury market. © 2004 Rosen Consulting Group, LLC 1 Outlook Summary • As tens of thousands of new units come online and speculators attempt to flip their units to owner-users, supply may outstrip demand and recent price increases will likely come to an end. The speculative investors who are unable to close on their units, the developers who have sold to those people, and the lenders who have lent to those developers are poised to potentially experience hardship. • We anticipate a glut of supply during the next few years to meet reduced levels of demand. It seems that too much of the wrong product is currently being built. As speculative demand dries up and interest rates rise, absorption of these units may take several years. • Similarly, price appreciation since 2000 has driven prices to a premium that the market will eventually correct. In our base scenario, prices will decline slightly in the near term and stagnate through the medium term. In our decline scenario, prices may fall sharply in 2005 and subsequent years. • Looking forward, developers of moderately priced con- dominium housing may be better off than those com- peting for the top few percent of buyers. While the majority of new projects being built are targeted at luxury buyers willing to pay a minimum of $300 per square foot and often well over $500 per square foot, lower-end projects may be more successful at attract- ing local owner-users. These units might also be more rentable in the case that they are not purchased by owner-users. • In the longer-term, demand for condominiums in South Florida will be strong. The limited supply of develop- able land and favorable demographic trends in the area will lead to a shift towards high density housing in the future. © 2004 Rosen Consulting Group, LLC 2 Introduction We are writing this paper to address current concerns about the • The paper begins with a discussion of South Florida’s level of activity in the condominium market in the South Florida current economic profile and RCG’s outlook on the region. In a time when people are discussing the potential for economy through 2006. We discuss the major drivers housing bubbles nationwide, the high volume of activity in South of the economy: international ties, trade and tourism, Florida merits particular attention. as well as other smaller but important sectors. In recent years, the residential condominium market in South • In the following section, we outline current and pro- Florida has exceeded the already elevated levels of activity else- jected demographic trends in the area. We also dis- where in the country. Demand has thus far kept pace with mas- cuss the profile of South Florida tourists, an important sive amounts of new supply, leading to strong price apprecia- contributor to future population growth. tion in many markets. Although demand for preconstruction sales has seemed to be strong, it is important to understand • From there, we move to a specific historical analysis where this demand is coming from and whether it will be sus- of the South Florida condominium market. We outline tained through the completion and delivery of a historically high past residential real estate cycles before discussing number of new units between 2004 and 2007. condominium sales volumes and price appreciation. Condominiums are an important part of the South Florida hous- • The next section details sources of demand for con- ing stock and condominiums make up a higher percentage of dominium units and profiles of the people creating that total housing stock in the area than in almost any other part of demand. We address demand profiles for different the country. Looking forward, land supply constraints and strong submarkets as well as the role speculative investment population growth will encourage increased condominium de- plays in creating demand. velopment activity as demand for high density housing increases. With suburban residential development rapidly approaching the • In the supply section, RCG analyzes current condo- Everglades urban growth boundaries, land availability has al- minium development trends in a historical perspective. ready begun to decline and land prices will only rise farther with We go on to discuss how South Florida’s limited supply increasing scarcity. of developable demand will affect supply dynamics in the future before going into an in-depth analysis of However, the recent spate of development is too much, too soon. building permit data. As in the early 1980s, tens of thousands of new units are being built in excess of projected demand. Over the next few years we • Burrowing deeper, we outline current condominium anticipate a supply overhang as units are delivered to a market development activity in the Building Activity by unable to bear the level of new supply.